Date: 19991008
Docket: 97-3179-IT-G
BETWEEN:
KHI C. TRIEU,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Counsel for the Appellant: Donald G. Kidd
Counsel for the Respondent: Peter M. Kremer
___________________________________________________________________
Reasons for Judgment
(Delivered orally from the Bench at Toronto, Ontario, on September 17, 1999)
Bowie J.T.C.C.
[1] These three appeals are from reassessments of the Appellant for income tax for the taxation years 1992, 1993 and 1994. The reassessments were made on a net worth basis.
[2] The Appellant has worked for a company called Polycon Industries since 1983. He worked his way up from a relatively low level to become a program manager. During the years under appeal he earned between $28,000 and $50,000 a year there. In addition, he had interests in two rental properties, from which he claimed relatively small amounts of losses. He is married and has two children. His mother lived with his family during the relevant period. During the three years under appeal his wife earned income of $3,497, $4,612 and $12,606.
[3] Mrs. Karen Quantz is the Revenue Canada officer who raised these assessments. She testified that she was assigned to investigate, and possibly reassess, the Appellant's brother Khai Trieu. She soon discovered that Khai Trieu and Khi Trieu were brothers, and that they shared ownership of an income property, and she decided that she should investigate them both. Her enquiries soon showed that Khai Trieu had substantial unexplained bank deposits, and that his records were almost non existent. He had some rudimentary records with respect to the rental properties, but otherwise no records to indicate the source or the disposition of the various deposits and withdrawals of substantial sums from his bank accounts; this, notwithstanding that during his evidence he testified that he had registered a business name with the intention of going into a grocery business, which ultimately did not proceed, and that he had been involved in what he described as a fake jewellery business with a Mr. Lam.
[4] Net worth assessments proceed on the assumption that a taxpayer's income for a year is the difference between his net worth at the beginning of the year and his net worth at the end of the year, plus the total of all of the amounts that he has consumed or gifted away during the year. It has been called an unsatisfactory and imprecise method of determining income, and one to be used only as a last resort.[1]
[5] Counsel for the Appellant did not dispute the Minister's right to proceed by a net worth assessment, nor is that open to challenge in this court since the judgment of the Court of Appeal in Morrow v The Queen, 92 DTC 6380. The state of this Appellant's recordkeeping left the assessor no real alternative. What makes the net worth method unsatisfactory and imprecise is in large measure the difficulty in assessing consumption with any accuracy. There are, of course, also difficulties in evaluating net worth at the necessary points in time. The assessment of consumption requires forming an estimate of the amount expended throughout the year by the taxpayer to support his family, and including in it both ongoing expenditures of a routine nature and more intermittent ones such as vacations. To understate the consumption results in understating the income for the year.
[6] In the present case much of that uncertainty, perhaps all of it, is removed by the facts that the Appellant was invited by Ms. Quantz to provide her with an estimate of his expenditures for consumption during each of the three years, and that she accepted his estimates. At the trial his evidence was that if his estimates were in error, then it is because they were too low and not too high. In other words, he erred in his own favour, and Ms. Quantz accepted that. The Appellant also accepted without reservation the assessor's tabulation of his assets and his liabilities at the end of each of the years 1991 to 1994.
[7] The area of dispute, therefore, was narrowed to the adjustments to be made to the assessor's computations in respect of amounts borrowed by the taxpayer from his mother and his two brothers, Khai, who like the Appellant lives in Guelph Ontario, and Tri, who lives in Australia.
[8] In the course of her investigation, the assessor obtained from the various banks where the Appellant had accounts particulars of his withdrawals of amounts greater than $1,000 during the period. She proceeded on the assumption that withdrawals of that magnitude should be included in the Appellant's expenditures unless there was an explanation of them which verified that they were accounted for elsewhere in the computation. For example, a withdrawal to repay a loan or to purchase an asset would be excluded, because there was an offsetting decrease in liabilities, or an increase in assets during the year. Only where the application of the amount withdrawn could not be established did it form part of the computation of net worth. Withdrawals of less than $1,000, she assumed, were for personal living expenses, and so were not separately included.
[9] The assessor computed the Appellant's income by the net worth method, and compared it to the income he had reported for the three years. In this latter amount she included the gross rental income from the Appellant's income properties, because the expenses relating to those properties could not be satisfactorily segregated from his personal expenses due to a lack of proper recordkeeping. She also included the income declared by the Appellant's wife for each of the years, as the Appellant and his wife shared a joint bank account, and the assumption was that the proceeds of her employment went into that bank account.
[10] The result of these computations may be summarized as follows:
|
1992 |
1993 |
1994 |
|
|
Income by the net worth method |
$65,884.41 |
$108,659.72 |
$126,715.67 |
|
Income reported |
$45,266.26 |
$ 78,482.73 |
$ 83,543.69 |
|
Shortfall |
$20,618.15 |
$ 30,176.99 |
$ 43,171.88 |
The reassessments added these amounts to the Appellant's income previously assessed, as filed by him.
[11] The Appellant's primary position with respect to these assessments was this. He says that he had no source of income other than his job at Polycon Inc. and the rental properties, and that he properly reported all of his income in each of the years under appeal. This evidence, counsel said, should be believed and, absent any evidence brought forward by the Respondent to show an undisclosed source of income, that should resolve the matter in the Appellant's favour.
[12] The apparent discrepancies, according to the Appellant's theory, are explained by the fact that he borrowed money from time to time from his mother and from his two brothers, and these borrowings have not all been taken into account by Ms. Quantz. Ms. Quantz did take some borrowings into account, but only those that could be matched to some evidence that corroborated the Appellant's statement. For example, she accepted that the Appellant's mother loaned him $4,000 in 1992, because there was evidence that she had withdrawn that amount from a Registered Retirement Savings Plan in that year.
[13] I reject the Appellant's contention that I should simply accept as true his evidence that he had no other source of income in 1991, 1992 and 1993, and that the discrepancies between the net worth computation and his declared income are due to inter-family loans and transfers of money from one account to another.
[14] The Appellant testified that he borrowed money from both his mother and his brother Khai on an ongoing, revolving basis, that he and they kept no written records of these loans, and that he could not remember the specifics of them. His mother gave evidence that she too could not remember the specifics of them, except that she testified as to a $5,000 loan in addition to the loan of $4,000 which Ms. Quantz accepted. I shall say more about that $5,000 loan later. This is not the sort of evidence of which successful appeals are made. The Federal Court of Appeal said in Njenga v R., 96 DTC 6593:
The Income tax system is based on self monitoring. As a public policy matter the burden of proof of deductions and claims properly rests with the taxpayer. The Tax Court Judge held that persons such as the Appellant must maintain and have available detailed information and documentation in support of the claims they make. We agree with that finding. Ms. Njenga, as the Taxpayer, is responsible for documenting her own personal affairs in a reasonable manner. Self written receipts and assertion without proof are not sufficient.
The problem of insufficient documentation is further compounded by the fact that the Trial Judge, who is the assessor of credibility, found the applicant to be lacking in this regard.
The same applies to the present case.
[15] The Appellant gave specific evidence of loans from family members which had not been accepted as genuine by Ms. Quantz, and his counsel's alternative submission was that I should at least accept that these were genuine loans, and so adjust the assessments accordingly.
[16] The Appellant testified that he borrowed the sum of $5,000 from his mother in 1993 to enable him, along with his brother Khai, to purchase a sixplex during that year. He said that his mother might keep as much as $2,000 in cash in the house, but on this occasion she drew $5,000 from her bank account in cash to make the loan to him. Ms. Quantz testified that she would have accepted this and given the Appellant credit for it as a loan, thereby reducing his estimated income for 1993, if only she had been shown a corresponding withdrawal by the Appellant's mother. This evidence, counsel says, was corroborated by the evidence given by the Appellant's mother. Her evidence as to the amounts that she loaned to the Appellant, however, was extremely vague. She said that she loaned him $5,000 to buy a house but could give no particulars as to when the loan was made. Their evidence was consistent that the Appellant now owes his mother $15,000, but I do not find her evidence to be of sufficient particularity as to be reliable. Most telling, however, is that throughout the lengthy period when Ms. Quantz was conducting her assessment, including at least two meetings that she had with the Appellant and his accountants, there was no mention to her of this $5,000 loan which the Appellant now claims was made to him by his mother. Nor is there a record of a corresponding deposit by him of $5,000 in any of his bank accounts in June 1993 or at a time nearby, that being the time at which he claims to have received the amount in cash.
[17] Mr. Kidd submitted in argument that there were two $5,000 loans, one in 1993 and one in 1994, both from the Appellant's mother. I do not believe that the evidence supports this theory. It is much too vague, and I have no confidence that either the Appellant or his mother has any clear recollection of these supposed loans. In my view, it is most likely that if they existed at all, then Ms. Quantz would have heard of them before she completed her audit.
[18] The next item which was put forward is a loan which the Appellant claimed to have received from his brother Tri in Australia. His evidence was that he took a leave of absence from his job for a large part of 1992, and during that time he travelled to Australia to visit his brother there. Part of the reason for going to visit his brother was to learn from him how to begin and operate a grocery business. While there, he said, his brother loaned him 13,000 Australian dollars to be used as working capital in his proposed business. His brother gave this to him, he said, in cash, which he brought back to Canada and changed into Canadian dollars at a currency exchange in Ottawa where he was visiting his sister. For the amount in question he obtained $13,569 Canadian by way of a bank draft which he later deposited to a bank account.
[19] Counsel for the Appellant tendered a four line purported affidavit of Tri Trieu to corroborate this evidence, and asserted that I should admit it in evidence under the provisions of sections 52, 53 and 54 of the Canada Evidence Act and Rule 143 of the Rules of this Court. I did not admit the affidavit in evidence. I am not satisfied that it was sworn before a judicial officer in Australia or any of the other categories of persons enumerated in section 52 of the Canada Evidence Act. The person before whom it was sworn is described simply as a legal clerk to a firm of lawyers in Melbourne. It bears no seal of the legal clerk, or of a court or any other person. It is totally devoid of particulars stating only:
(a) I am the brother of Khi Chi Trieu of 53 Freshmeadow Way, Guelph, Ontario, Canada;
(b) I have given a loan to my brother Khi Chi Trieu in the amount of 15,000 Australian dollars during his visit here in the month of July 1992.
It would, of course, if admitted, not be subject to cross-examination. No attempt was made by the Appellant's counsel before trial to have this evidence given in some other way, such as by video conference, which would allow for a cross-examination. Certainly a video conference between Canada and Australia might be difficult to arrange, but I do not think that it would be impossible. Certainly the possibility should have been explored before tendering this kind of evidence. Mr. Kidd submitted that I should admit the declaration for whatever weight it might have. In my view it deserves no weight, and even if it complied with the requirements of the Canada Evidence Act, I would not exercise my discretion under Rule 143 in favour of its admission.
[20] The Appellant testified that he decided not to enter into the grocery business. After making enquiries, he concluded that it would not be financially feasible for him to do so. However, he said his brother Tri, after learning of this, told him that he should keep the 13,000 Australian dollars as a contribution towards the support of their mother. I do not accept this evidence. Not only is it self-serving, but it does not have a ring of truth about it. It seems unlikely that the Appellant would carry such a sum about in currency for even a week or two, rather than use some more conventional means of transferring funds from his brother's account in Australia to his own account in Canada.
[21] Finally, Mr. Kidd submitted that I should take into account two transactions whereby the Appellant claims to have received $6,000 and $1,800 in cash from his brother Khai Trieu as an element of the ongoing revolving loan between them. The Appellant's evidence as to these transactions is as vague as all his other evidence, and deserves no more weight. It is significant that Khai Trieu did not testify. I draw the inference that his evidence would not have assisted the Appellant. It was suggested by counsel that the reason Khai Trieu did not testify was because he is the subject of some type of criminal investigation with which the Appellant would be tainted if he were to appear and testify in this Court. This is a quite untenable proposition. Appellants before this Court are judged on the evidence, and not upon whether or not their relatives are subject to investigation by the authorities. I emphasize that the Appellant kept few records relating to his rental properties, and none relating to his alleged inter-family loans and inter-account transfers of funds. He had substantial deposits to and withdrawals from his various bank accounts, which he either could not or would not explain.
[22] Mr. Kidd submitted that the Appellant's evidence was sufficient that the onus should pass to the Respondent to show a source of the incremental income added by these reassessments. I disagree. The Appellant's evidence is not at all persuasive.
[23] I have not overlooked that an accountant, Mr. Weiler, testified for the Appellant in an attempt to show that the net worth computations were not properly carried out by Ms. Quantz. His evidence included a net worth calculation which he said was carried out by his partner in accordance with Revenue Canada's methodology, and subsequently reviewed by him. That document purported to show that the Appellant and his wife between them had not under reported, but that they had in fact over reported their income by $27,106, $3,074 and $5,004 in the years 1992, 1993 and 1994. If they had over reported an amount of $27,000 in 1992, then their combined income for that year would have been approximately $18,000. But the Appellant had employment income of $48,000 from Polycon Industries and his wife had a further income of $3,500 verified by a T4 slip. Mr. Weiler appears to have achieved the result that he did by the simple expedient of accepting that all of the unexplained amounts are, as the Appellant contends, explainable as inter-family loans, and transfers within his various bank accounts. Significantly, Mr. Weiler was not able to point to any substantive flaw in the computation by which Ms. Quantz arrived at her conclusion. I do not find his evidence to be of any assistance.
[24] The appeals are dismissed with costs.
Signed at Ottawa, Canada, this 8th day of October, 1999.
"E.A. Bowie"
J.T.C.C.